Problem A $12$ marks

Union Lighting Inc. has been manufacturing its own lamp shades for its table lamps. The company is currently operating at $100\%$ capacity. The direct materials cost is $ $5$ per unit, the direct labour cost is $$6$ per unit and variable manufacturing costs are $40\%$ of direct labour costs. Total fixed manufacturing costs are $$500,000$ per year. Normal production is $50,000$ lampshades per year.

A supplier offers to make the lampshades at a price of $$20$ per unit. If Union accepts the offer all variable manufacturing costs would be $100\%$ avoidable and $$200,000$ of the total fixed manufacturing costs would be unavoidable.

a$)$ Prepare an incremental analysis for the decision to make or buy the lampshades.

b$)$ Should Union make or buy the lampshades? What is the $ advantage?

c$)$ Assume that if Oldman decides to buy the lampshades part of the factory space could be used to produce $10,000$ other lighting products that would generate a contribution margin $$15$ per unit. Should Union make or buy the lampshades? Show your calculations.

Problem B $17$ marks

MOMA Inc. can produce three different products interchangeably on two machines which have a total availability of $250$ hours per month. The accounting department provides the following information on these products.

A B C

Selling price per unit $$25$ $$35$ $$80$

Variable costs per unit $$15$ $$20$ $$45$

Time required to produce $1$ unit $6$ minutes $12$ minutes $42$ minutes

Minimum units that must be produced per month $100$ none $140$

Maximum unit demand per month $200$ none $200$

Required:

a$)$ Prepare a production plan that shows how many units of each product should be produced for the period in order to maximize contribution margin.

b$)$ Compute the total contribution margin expected based on the production plan

Problem C $16$ marks

Hi$-$Tech is the creator of Y$-$Go$,$ a technology that weaves silver into the fabric to kill bacteria and odour on clothing while managing heat. Y$-$GO has become very popular in undergarments for sports activities. Operating at capacity, Hi$-$Tech can produce $500,000$ undergarments each year. The normal selling price is $$10$ per unit. The per unit cost for each unit is as follows:

Per unit

Direct materials $$2\mathrm{.}00$

Direct labour $0\mathrm{.}50$

Variable manufacturing overhead $1\mathrm{.}00$

Fixed manufacturing overhead $1\mathrm{.}25$

Variable selling expenses $0\mathrm{.}25$

The Canadian armed forces $($CAF$)$ has approached Hi Tech and expressed an interest in purchasing $75,000$ Y$-$GO undergarments for soldiers stationed in hot climates.

Required:

To answer a$,$ b$,$ and c$,$ use the minimum price model:

Minimum price model

Variable cost XX

Plus: Lost CM on regular sales XX

Equals Total minimum price $($TMP$)$ XX

Unit price $($TMP$/$ units in special order$)$

a$)$ If Hi$-$Tech is operating at $100\%$ capacity what is the minimum price to charge?

b$)$ If Hi$-$ Tech is operating at $90\%$ capacity what is the minimum price to charge?

c$)$ If Hi$-$Tech is operating at $70\%$ capacity what is the minimum price to charge?

d$)$ Assume High Tech is operating at $90\%$ capacity and Hi$-$tech receives a special order from the CAF for $75,000$ Y$-$Gos at a selling price of $$8\mathrm{.}00$ per unit. Compute the increase in profit $($or loss$)$ if High Tech accepts the order.